S&P: Shale Oil Boom Has Far-Ranging Impact

An oil drilling rig and housing for workers is seen outside Williston, North Dakota, October 19, 2012. Thousands of people have flooded into North Dakota to work in state's oil drilling boom.REUTERS

The rapid increase in U.S. shale oil production, which is expected to give the nation energy self-sufficiency by the end of this decade, is having a far-ranging impact that has spread to other industries.

A report Tuesday from Standard & Poor’s said the shale energy boom is an increasingly central part of economic growth, coupled with the housing recovery. The report noted that Bentek Energy, another unit of McGraw Hill Financial (MHFI), projects U.S. energy independence — when exports are greater than imports — by 2017.

S&P Managing Director David Wood said in an interview that energy self-sufficiency would be a direct result of the increase in oil and gas produced domestically from shale plays.

But he explained that the ability to transport oil from shale plays to refineries in the Gulf Coast will be a key factor in seeing exports rise, in addition to the possibility of negative impacts from environmental-related incidents.

“Infrastructure is still underdeveloped to get oil and natural gas to Gulf refineries for export,” Wood said, adding that TransCanada's (TRP) Keystone XL pipeline, if completed, could facilitate the process.

In the meantime, oil exploration and advancements in drilling techniques have opened up reserves to give new life to the industry.

Hydraulic fracturing has been around since the late 1940s, but its combination with horizontal drilling 15 years ago allowed for the recovery of oil that was previously unreachable.

That combination, along with other advancements, led in recent years to a spike in oil production and surge in activity at the Eagle Ford shale play in Texas, North Dakota’s Bakken formation and others.

North Dakota production accounted for 10% of total domestic crude oil production in 2012 and trailed only Texas and the U.S. Federal Offshore region, according to the EIA.

Shale Oil’s Widening Impact

According to S&P, oil and gas companies directly involved in the production and refining process aren’t the only ones benefiting from a roaring energy sector.

Steel piping producers, builders of rail tank cars and express package deliverers are some of the businesses impacted positively by the oil boom. Wood also noted that the need for rail cars that transport oil and sand used in the fracking process made leasing of those rail cars more popular.

“This is beginning to impact not only companies in the oil and gas sector,” Wood said of the shale oil boom. “Some industries have sales growth because they are selling into the sector.”

Falling natural gas prices have also given the economy a boost by bringing manufacturers and chemical companies back to the U.S., the report said.

Cheaper natural gas is also helpful to makers of vehicles powered by compressed natural gas and related components. The report noted that UPS (UPS) currently uses 1,100 CNG vehicles in the U.S.

“This has also played a supporting role in the remarkable recovery of the manufacturing sector, by helping to give it a competitive edge over overseas competitors,” S&P said. “While energy makes up a relatively small amount of overall manufacturing costs, it still encourages more plant openings in the U.S. than otherwise would be the case.”

But lower natural gas prices are also putting pressure on other industries. Wood explained that prices have dropped significantly because natural gas isn’t easily exportable and a glut in supply has exceeded demand. Prices have rebounded lately amid a cutback in production, but he said the economics of drilling for natural gas remain challenging.

“We have downgraded companies that tend to have larger exposure to natural gas on 40 separate occasions” since January 2011, Wood said. Those downgrades include oil and gas exploration companies, as well as equipment and service companies.

U.S. Oil Boom Weighs on Some Industries

The surge in domestic oil supply also has created challenges for businesses like coal mines and freight railroads, and even the oil industry itself.

Coal mining has suffered most from cheaper natural gas, the S&P report noted, since many electric utilities have switched to gas-fired plants. One miner rated by S&P, Patriot Coal Corp, declared bankruptcy last year.

And coal is one of the chief materials transported by freight railroads, which only partially have been able to replace lost revenue related to coal with higher volume of other products like crude oil.

“Solar and wind power producers in the alternative energy sector, as well as manufacturers of solar panels and wind turbines, are other industries that lower natural gas prices have hurt, as they lead to cheaper wholesale electric prices and a reduction in these industries' competitiveness,” the report added.

Wood also explained that within the oil and gas sector, benefits gained from the explosion in production “are not uniform” since some companies have a higher proportion of their business in crude oil compared to others that are more reliant on natural gas.

As a whole, however, the industry and shale oil boom are carrying the U.S. to energy independence faster than previously imagined.

“The surge in shale energy production across a broadening swath of the U.S. is not only spurring the growth of the oil and gas sector and the economy as a whole, but is also affecting the economics, financial performance, and credit metrics of over 20 other industries,” the report said. “Barring any major environmental accidents related to onshore shale drilling, which could slow or reverse industry growth, we expect the U.S. to approach energy self-sufficiency toward the end of this decade.”

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